TECON BIOLOGYLTD (SZSE:002100) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, TECON BIOLOGY Co.LTD (SZSE:002100) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for TECON BIOLOGYLTD

What Is TECON BIOLOGYLTD's Net Debt?

The chart below, which you can click on for greater detail, shows that TECON BIOLOGYLTD had CN¥5.27b in debt in September 2024; about the same as the year before. However, it does have CN¥3.66b in cash offsetting this, leading to net debt of about CN¥1.61b.

How Strong Is TECON BIOLOGYLTD's Balance Sheet?

According to the last reported balance sheet, TECON BIOLOGYLTD had liabilities of CN¥6.16b due within 12 months, and liabilities of CN¥2.28b due beyond 12 months. Offsetting this, it had CN¥3.66b in cash and CN¥1.13b in receivables that were due within 12 months. So it has liabilities totalling CN¥3.65b more than its cash and near-term receivables, combined.

TECON BIOLOGYLTD has a market capitalization of CN¥8.51b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TECON BIOLOGYLTD's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year TECON BIOLOGYLTD had a loss before interest and tax, and actually shrunk its revenue by 7.5%, to CN¥17b. We would much prefer see growth.

Caveat Emptor

Importantly, TECON BIOLOGYLTD had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥392m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥215m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like TECON BIOLOGYLTD I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.